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Market Commentary

November 2017 Market Commentary – Laggards Catch Up on Tax Bill Prospects

Data Source: Bloomberg

Highlights:

• Global equities continued their YTD run of strong performance coming from the U.S. and Japanese markets.
• However, this month saw a disparity in regional performance as European and Emerging Markets posted only slightly positive returns.  Many attributed this underperformance to political uncertainty in Germany and a regulatory crackdown on financial leverage in China.
• Fixed income experienced another flat month of performance as the U.S. Treasury Yield oscillated between 2.30 to 2.40%.  The flattening of the yield curve (2- vs 10-year yields) has some market observers worrying about a possible slowdown on the heels of Federal Reserve rate hikes.
• Despite the flat QTD performance, dividend and high quality-based strategies performed well in November.  Small Cap and Value-focused strategies, which had lagged for the better part of the year, also recovered late in the month on improved prospects of Republican-led tax legislation being passed this year.  However, prospects for Senate passage remain unclear as of the time of this writing. 
• Perhaps the Republican tax plan along with momentum in global economic growth will help unleash corporate appetite for capital spending that can help extend the cycle.  And productivity gains from increased spending could help alleviate inflationary pressures from the added fiscal stimulus coming from tax relief and, maybe, infrastructure spending initiatives as part of the 2018 legislative calendar.  
• A flattening yield curve and widening credit spreads could amount to additional headwinds for value strategies to outperform the broader market.
• Emerging markets had been leading all other major regions for the better part of the year but then gave up that leadership as financial regulators continued their efforts to curb back shadow banking lending that has produced high amounts of corporate and personal leverage.
• As of the time of this writing, U.S. markets are experiencing some volatility due to news that Special Counsel Robert Mueller has reached a plea agreement with former Trump national security advisor, Mike Flynn.  The prospect of Mueller’s probe reaching further into the Trump inner circle could give investors pause in pricing in lower volatility. 

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